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Calculate the after-tax cost of debt

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Reference no: EM132411061

A new floating-rate debt issue pays interest annually based on the one-year Treasury bill rate. Assume zero issuance cost. The issue matures in five years. The current one-year Treasury bill rate is 9%, and the forecast one-year rates over the next four years are 9.25%, 9.5%, 9.75%, and 10%. The coupon equals the beginning-of-period Treasury rate plus 100 basis points. There is no sinking fund.

a. Project the debt service payment stream.

b. Calculate the pretax cost of debt.

c. Calculate the after-tax cost of debt, assuming a 34% tax rate.

Reference no: EM132411061

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